The Financial Supervisory Service has discovered illegal short selling amounting to over 200 billion won. This was the result of a thorough investigation following the discovery of illegal short selling by a global investment bank last year.
On the 6th, the Financial Supervisory Service announced that out of 14 global investment banks conducting significant short selling transactions in the domestic market, a total of 9 banks were found to have engaged in illegal short selling amounting to 2.112 trillion won across 164 stocks from May 2021 to the end of last year.
Previously, the Financial Supervisory Service had revealed illegal short selling by global investment banks BNP Paribas and HSBC (556 billion won) in October last year, followed by A and B companies (540 billion won) in January this year.
The investigation results revealed that the scale of violations by A and B companies has expanded to 1.168 trillion won, and additional illegal short selling totaling 388 billion won by the other 5 banks was also discovered.
According to the Financial Supervisory Service, global investment banks committed no-borrow short selling due to practical errors in balance management systems, lack of understanding of Korean short selling regulations, and other factors.
Measures such as submitting sell orders before the confirmation of return of borrowed or pledged stocks and selling already borrowed stocks between internal departments during the stock loan process led to instances of no-borrow short selling.
The Financial Supervisory Service has imposed fines (265 billion won) and reported to the prosecution regarding the initial discovery of illegal short selling by BNP Paribas and HSBC, and will promptly initiate sanctions proceedings as additional investigations on the remaining investment banks are completed.
The Financial Supervisory Service also emphasized enhanced cooperation and international collaboration with overseas financial authorities such as Hong Kong in illegal short selling investigations. They have set up a cooperative channel for discussing investigation-related issues with Hong Kong regulatory authorities and plan to hold biannual video conferences to discuss major short selling-related issues.
Additionally, the Financial Supervisory Service will explain domestic short selling regulations and system improvements to major global investment banks in Hong Kong through a local meeting this month.
The Financial Supervisory Service has developed a short selling computerization plan that focuses on blocking no-borrow short selling through institutional investors’ internal systems and re-verifying all orders through a central system. However, given the need for legal revisions and around 12 months for system construction, the expected resumption of short selling in July may be delayed.